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Defaults Rising on Subprime Loans. What did New Century and Everyone Else Expect?

March 15, 2007

When rates were low almost anyone could get a home loan with no money down. The booming real estate market flooded financial institutions with cash and companies like New Century Financial and Accredited Home Lenders Holding Co couldn’t loan money out fast enough. It was inevitable that rates would rise and that subprime lenders would eventually be unable to make their payments.

How can the following headlines of the past few days come as a shock to anyone?

I’m not a financial expert, just a guy who digs personal finance, and I saw this coming years ago. How can anyone in the financial industry be surprised at how things have played out? What did they expect would happen?

Hard Times Ahead
The people I feel sorry for are those that borrowed at these unrealistic terms and will now lose their homes. Common sense should have told them this would happen but when you’re looking for a break and cheap money comes along I imagine it’s hard to pass up.

Unfortunately both the lenders and borrowers are now in a pickle and it doesn’t look like it’s going to get any better. I’ll take this as a lesson that common sense can go out the window when times are good and you have to rely on yourself to keep a level head.

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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

Comments

One Response to Defaults Rising on Subprime Loans. What did New Century and Everyone Else Expect?

I always wonder why this sort of news seems shocking as well. It isn’t just with issues like the housing and lending market, but even the broad market decline a while back. Why does this surprise anyone?

For example with the markets, we’ve been on an extremely bullish run for 3 straight years, and it comes to a shock that the market pulled back a few percentage points? OMG THE SKY IS FALLING@#)(*#% Like we were supposed to continue to see 10-20% returns every year… give me a break.

Same with the subprime market as you mentioned, seriously, did these lenders actually think this would be a good idea? You lend more money than you should to people who are a greater credit risk… and they didn’t see a potential problem cropping up in the future?

Granted a lot of this stems from the lenders who were providing and marketing this type of lending to people who probably couldn’t afford it, but I don’t have a whole lot of sympathy.

Like you said, common sense is all but gone from the majority of this country. You have kids right out of college who land their first $45k a year job and go out and buy a $350,000 condo because the bank says they can. Now they realize they can’t afford the new payment since they got sucked into a crappy ARM and rates have gone up and on top of that their real estate hasn’t appreciated like they thought and find themselves up poop creek without a paddle.

So anyway, I do feel bad that the lenders pushed so hard and marketed these loans to people, but I really don’t feel bad that people aren’t smart enough to assess their situation before making a substantial purchase like a home and end up getting burned. Sometimes the only way people learn is by experience.

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About Ben

I'm Ben Edwards and I've been addicted to personal finance since I was 12 years old.

That passion for money has paid off for my family - so in 2006 I founded Money Smart Life to help you afford the life that you want. Read My Story...